Defence pack set for strong momentum; budget boost, exports to drive growth

Motilal Oswal Financial Services expects India's defence sector to maintain strong order momentum, supported by ongoing negotiations for new deals, recent Defence Acquisition Council (DAC) approvals, a clear TPCR roadmap, emergency procurement initiatives, and prospects of higher budget allocations.

 

The brokerage said these developments ease concerns around order inflows and reinforce long-term growth visibility for domestic defence manufacturers. 

 

Motilal Oswal remains positive on Bharat Electronics, Hindustan Aeronautics and Bharat Dynamics, assigning 'Buy' ratings with target prices of ₹500, ₹5,800 and ₹2,000, respectively, while maintaining a 'Neutral' stance on Zen Technologies.

 

Motilal Oswal noted that long-term demand remains robust, driven by expectations of higher defence allocations in the upcoming Union Budget and approvals worth ₹7 trillion under Acceptance of Necessity (AoN) from FY24 to the first 10 months of FY26. Additional tailwinds include rising defence spending across NATO countries, which is opening export opportunities for Indian platforms, and the ₹40,000 crore emergency procurement programme under the Fast Track Procedure that mandates faster acquisition timelines.

 

The brokerage highlighted a strong order prospect pipeline across key platforms, particularly in defence electronics. Bharat Electronics is expecting significant subsystem orders for next-generation corvettes, avionics orders linked to the LCA Mk-1A, mountain radar systems, and new Shatrughat and Samaghat electronic warfare platforms, in addition to a large order for the Quick Reaction Surface-to-Air Missile (QRSAM) system.

 

Margins across the sector are improving as indigenisation accelerates. The share of domestic procurement has risen from 54 per cent before Covid to 75 per cent in the FY26 defence budget. In FY25 alone, 92 per cent of contracts went to Indian companies. This shift, Motilal Oswal said, is reducing import dependence, lowering input costs and enhancing control over supply chains.

 

With indigenous sourcing rising consistently, most companies expect margins to remain elevated, the brokerage said. "A few large defence PSUs may, however, witness a margin moderation due to a high proportion of manufacturing revenue, though overall revenue growth is expected to remain strong."

 

With demand visibility strengthening, defence companies are in the midst of a broad capacity expansion cycle to support long-term requirements across platforms. The industry is executing a multi-year manufacturing buildout aligned to India’s growing defence ambitions, the brokerage added.